Based on 77 publicly traded SaaS companies we follow, valuations for SaaS remain strong: the average public SaaS business is trading at 7.07x revenue while the median is 6.91x. The data, along with a few more observations, is below.
The median SaaS business had trailing twelve month revenue of $255mm, EBITDA of -$11mm, but positive cash flow of $19mm thanks to deferred revenue and up front collections on annual contracts. Indeed so long as you’re growing (the median annual growth rate is 21%), investors will overlook negative EBITDA especially if the business is cash flow positive after working capital changes.
There is almost no debt on these businesses (banks don’t like asset-light businesses) and $145mm of cash on the balance sheet on median, equivalent to 13 years of burn (recall EBITDA is -$11mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $19mm), and indeed only 10 out of the 77 have negative cash flow. Note that 42 out of the 77 have negative EBITDA, but again that’s acceptable so long as the growth is there and cash flow overall is positive.
Valuations are still a strong 6.91x trailing twelve month revenue on median. As you can see from the chart, since 2014 valuations have been generally trending up.
So what’s this data mean for a fast growing private SaaS business? Public multiples and trends tend to guide what’s happening in the private markets: i) as compensation for illiquidity, size, and lack of profitability, investors will look to invest in your private SaaS business somewhere between 4x and 6x unless your growth rate is demonstrably higher than 21% YOY; ii) financing will continue to come from equity, less so from debt, although we’ve seen banks like Bridge Bank get more aggressive and lenders like Lighter Capital get more creative; iii) and burning cash is still acceptable on an EBITDA basis, so long as free cash flow is positive or moving in the right direction.